Don't Count Out US Air

Rivals are taking note of the carrier's steps to restructure operations.
By Ross Snel ,

With a little help from its friends,

US Airways

(UAIRQ.OB)

has increased its odds of successfully emerging from Chapter 11 bankruptcy protection -- much to the chagrin of some competitors.

The Arlington, Va.-based airline, which is on its second trip through bankruptcy court since the Sept. 11, 2001, terror attacks, has confounded naysayers who predicted the carrier could be forced into liquidation as early as the first quarter of this year.

In addition to using the bankruptcy process to wrangle key labor concessions and rid itself of most of pension obligations, US Airways has notched a series of deals to shore up its liquidity. The most recent came March 14 when regional airline

Republic Airways

(RJET)

offered to buy $125 million of new US Airways stock if and when it emerges from Chapter 11. It also gave US Airways the option to sell its various assets, including planes and airport slots, for up to $110 million.

"Most of the other guys expected them not to be around," said Helane Becker, airline analyst at Benchmark, a New York-based brokerage. (Benchmark neither does nor seeks to do business with companies its analysts cover.) "Their ability to gain capital is astonishing."

The Republic deal follows a pledge last month for $125 million in debtor-in-possession financing from an affiliate of privately held Air Wisconsin Airlines, another regional carrier. The financing would turn into a post-bankruptcy equity stake. In November, US Airways restructured aircraft financing agreements with

General Electric

(GE) - Get Report

, giving it additional liquidity.

In the long run, the financing won't help holders of US Airways shares, which are likely to be rendered worthless when the carrier emerges from court. The last time US Airways exited Chapter 11, it canceled existing common stock.

But it does have implications for other carriers and their shareholders. Analysts said a re-emergent US Airways would pressure on

Delta Air Lines

(DAL) - Get Report

, which has the greatest route overlap with US Airways among large network carriers.

Low-cost carriers such as

AirTran

( AAI) and

JetBlue

(JBLU) - Get Report

could also suffer "if US Airways really comes out as a super low-cost operation," said Bob Mann, an industry analyst at R.W. Mann & Co. Having dispensed with most of its social programs and three rounds of concessions from employees, US Airways "ought to have those sorts of costs."

Like US Airways, both JetBlue and AirTran have a significant number of flights serving the East Coast.

US Airways has reduced labor costs significantly. For example, its average monthly pilot pay is now lower at all seniority levels than at network rivals

American Airlines

, a unit of

AMR

(AMR)

,

Continental

(CAL) - Get Report

and Delta,

Northwest

( NWAC), according to data from AIR Inc., an Atlanta-based pilot career information company.

Perhaps more notably, US Airways pilots now make less at all seniority levels than do pilots at low-cost carrier

Southwest Airlines

(LUV) - Get Report

. Discount airlines AirTran,

FLYi

( FLYI) and JetBlue still have lower pilot salaries at most levels of seniority.

By reducing its costs and ridding itself of most of its defined-benefit pension obligations, US Airways obviously is on better competitive footing. In the current industry environment, however, that may not be enough. Oil prices are again at record levels, and jet fuel constitutes the second-largest airline expense following labor. At the same time, a glut of capacity, accompanied by intense price competition, has left carriers unable to raise fares enough to cover fuel expenses.

"US Airways employees could have worked for free in January, and it wouldn't have made a difference," said Becker. "The revenue environment is the problem."

It also remains to be seen whether the financing US Airways is lining up is enough to put it on solid footing, especially with crude oil setting record highs this week.

"Their ability to corral $250 million is positive," said Mann, referring to the Air Wisconsin and Republic agreements. "The real question is, 'How much is enough?' given the energy price environment, the revenue environment and the overcapacity situation. The answer is probably the same as the rhetorical response that you can never be thin enough."

US Airways must still find an additional $100 million in financing -- a requirement of the Republic agreement.

Speculation is rife that regional airline

Mesa Air Group

(MESA) - Get Report

will step up with funding. Mesa provides regional flights for US Airways and could face the loss or downsizing of that business should competitors Air Wisconsin and Republic wind up with significant equity stakes in US Airways.

Mesa CEO Jonathan Ornstein did not return a phone call seeking comment.

A spokeswoman for Seabury Group, an investment bank advising US Airways on its restructuring, said the airline is in talks with "a variety of parties" for additional financing but declined to identify them.

Other challenges remain. US Airways must still file a reorganization plan with the bankruptcy court by April 15. And Republic's equity commitment is contingent on the regional carrier's approval of the plan.

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